In this workshop, Ken Long teaches the FROG trading system and the RLCO system.

Ken has been an a long-time active trader and observer of the markets. He's noticed the consistent habit of prices for particular issues to move a certain amount. Much like a frog jumps when it hears a loud noise, prices tend to move a certain amount before they pause or move again. Different frogs are able to jump different distances, but each one tends to jump about the same distance as it did last time. Would it be possible to know about how far a stock’s price would move on any given day? Ken’s frog system is a useful – and tradable - guide. Attend the day trading systems workshop and learn the frog and his RLCO systems. Stay on for two more days and trade those systems live alongside Ken!

“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden” —Phaedrus

Imagine being with about 4,000 teens in a convention center for three days while they listened to live music from heavy metal bands, rap groups, and even some traditional music groups. This past weekend, I was there right in the midst of them. Some of the music I liked, though a lot of it was not for my personal tastes. What amazed me, however, was the rather unusual crowd at this event.

I’ll quickly date myself by saying that I really liked attending concerts growing up. Bruce Springsteen, The Who and Dire Straits were favorite shows from my youth. The concert event I attended this past weekend (and the two years previous) was quite different from those rock and roll events I attended some years ago. At one point this past weekend, I stood with the teenagers trying to gain appreciation for one band’s head-bangin’ heavy metal tunes when I looked around and noticed there was not one single police officer or state trooper on site. Not even one hired security guard either. Things are not always what they seem.

This event was the Peninsula-Delaware United Methodist Youth Rally and several things contributed to the lack of need for any security services. First, the ratio of chaperones-to-students was high. Second, the group has a long and trouble-free history – this was the 27th annual Youth Rally. And lastly, these teens were there learning about their spiritual life and being encouraged to actively live out their beliefs. It’s a blessing to be part of well-run event like this and to realize that what society probably normally expects of teens (running wild at a heavy metal or rap concert) doesn’t have to play out that way at all.

In the markets – things are not always what they seem either. (Hopefully, that statement surprises exactly no one!) This is especially true when the pundits talk about so-called market tendencies. One that has been discussed much in the last few weeks is the “first five days” of January. The direction of the market’s first five days of January supposedly establishes the direction of the market for the entire year. Should we pay any attention to such a phenomenon? Does such a thing even exist?

The First Five Days of January – Is It Really a Thing at All?

Let me jump straight to the conclusion, and then give you the reasoning behind it: the First Five Days of January are meaningless for the direction of the market for the rest of the year. Now that we’ve got that out of the way, let’s see why.

Back in 2009, I dissected this indicator six ways to Sunday in an article in this newsletter. In short, there are many fallacies with the reasoning and analysis of this supposedly useful indicator. In the interim, nothing has happened that would convince me to change my mind.

Let me present another useful piece of data for your consideration regarding the First Five Days by reviewing the Stock Trader’s Almanac’s take on this indicator. (As a side note, I keep this book on my desk and find many parts of it very useful. The “first five days” indicator is just not one of them.) Hirsch & Hirsch tell us that a negative first five days has no predictive value (because the data shows that it’s right only half the time), but an up first five days has an “accuracy ratio” of 85%. That sounds impressive, doesn’t it? Unless you’ve read my previous article to understand why that may not be so impressive.

AND – here’s the “almost new” useful piece of information: Take a quick guess at the percentage of up years the stock market has had since 1950. The answer? The market has been up at the end of the year 75% of the time! That means that even with no indicator at all, you could guess that the market would be up by December 31 for any random year and be right 75% of the time. So filtering out the down years, this indicator takes that winning percentage up to only 85%?

To put it another way, an up “first five days” indicator led to an up year 85% of the time but the first five days (up and down) of ANY January led to an up year 75% of the time.

The bottom line? This indicator may be good cocktail party conversation (or filler for the talking heads on CNBC), but it certainly doesn’t tell us much of anything useful about the markets.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".

In my doctoral program, I wanted to know if we can learn to make better decisions and if we can teach others how it can be done. My research included an examination of how individuals and organizations can integrate traditional scholarly research and practical experiential knowledge to improve their understanding and appreciation of complexity and uncertainty.

My research suggests that Action Research (AR) is one of the ways this can be done systematically. AR follows a cycle of Planning, Acting, Researching and Reflecting, where the results of one cycle of action and research inform the next cycle.

The Four Types of Knowing

Heron and Reason (2008) described the four kinds of knowledge that arise from AR:

Experiential,

Presentational,

Propositional, and

Practical.

Experiential: Knowledge created by a conscious being, fully aware of and grounded in the immediacy of the direct sensory environment, while mindful of the duality of our mental imagery and the real world.

Presentational: Knowledge generated by and communicated through a variety of richly imagined artistry. This is Knowledge as metaphor as described in the Mythos vs Logos dialogue.

Propositional: Heron and Reason describe this as formal theoretical, conceptual knowledge, encoded in language. They characterize the dominant modern propositional knowledge in terms of logical positivism and Cartesian duality, and express concerns with the way it may serve to irreconcilably separate the subjective and objective.

Practical: Heron and Reason emphasizes the AR tradition of the primacy of the practical. This suggests we are sensible for pursuing the paths of the experiential and presentational forms of knowledge as they can be later validated through practice. This is knowledge in action that has consequences which can be compared to alternatives and then valued by human judgment. This is knowledge supported by a body of knowledge and a community of practice.

By systematically applying their insights to our trading practice, we can dramatically improve our performance and develop a robust strategy for adapting ourselves and our systems to a constantly changing market.

Linking the Four Ways of Knowing to Effective Trading

In a complex adaptive system like the markets, I think it’s useful for traders to explore all four ways of knowing when it comes to finding and deriving strategies that work. Those terms, finding and deriving, are critical in the process of gaining knowledge.

I say “finding” because sometimes you learn what parameters and perspectives are working in the market from reflective practice, and you move from results towards developing a theory of why they are working, so that you can test and refine. This would be an “inductive” or bottoms-up approach.

I say “deriving” because sometimes you have to start with a theory and work out the implementing rules that put the theory into action. This would be a “deductive” or top-down approach.

Both approaches can work, but both have their limitations. I find that an approach which respects the strengths and weaknesses of both approaches, as refined and developed through the four ways of knowing, is humble, careful and robust. Ultimately, that’s a very practical approach to developing trading skills and systems.

If you are interested in this line of reasoning, this 34-minute video describes the four ways of knowing as we apply them in our trading community of practice and learn from each other's trades:

About the Author: Dr. Ken Long retired from the Army as a Lieutenant Colonel and teaches at the U.S. Army Staff College. He is a proud father of three, a husband, teacher, student, martial artist and active trader. Ken also instructs dynamic trading workshops for the Van Tharp Institute. Watch this video to hear two testimonials from students of Ken Long.

Presently I'm a student (virtually speaking) @ the Van Tharp Institute. I've decided (at the beginning of my studies) to have Van be my Mentor (virtually). My motive for reading/studying several of your texts are as follows: personal growth (this formulated after my initial decision and immersion into the studies) and to become a better trader (original motive). I continue to study the Matrix, Super Trader, the Definitive Guide to Position Sizing Strategies (2nd edition), and A Course in Miracles, Napoleon Hill.

I am an engineer who is also retired USAF (22 yrs, prior service, Capt). My initial degree is in Philosophy with a minor in mathematics. My other degrees include a BS Aerospace Engineering and an MS Mechanical Engineering (both achieved while in the USAF). I am presently a consulting engineer (technical sales) and trader. I am also a Corres Chess Master and Cat 1 Over the Board Chess Player. I love playing bullet chess on the Internet (1 minute/side; note, this enjoyment played a decisive role in my system development).

My life's mission is to become a full time trader. I am a swing trader (holding time roughly 1-6 days) who has developed a system that matches my personality. I enjoy trading and I enjoy technical analysis (evaluating charts) and statistics.

I've been trading for roughly 10 years with mixed results. However, the last month of trading has seen dramatic changes to my equity curve and a greater sense of confidence, ease of selection, trade execution, system process control (me), and better overall statistics.

My most important and dramatic change (principle) has evolved around the DIALECTIC of Perception, Risk, Belief. It is a dialectical process whereby we change a belief, the perception, by definition changes, and finally the target of our perception (RISK) changes. The new understanding/perception of RISK feeds the belief function...thus the equilibrium has changed (to a higher level, so to speak). It is a never ending continuum.

The core principle for me involves RISK MANAGEMENT. My understanding and appreciation of this principle has changed dramatically. I am now able to quantify, measure and monitor this component of my trade before, during and after the trade. I'm talking about both Risk "to" my account, and actual equity risk (vs the market). They are different. NEVER before have I done this nor appreciated the significance of this process.

Further, and perhaps more importantly, the above dialectic, with RISK being the core dynamic, is by definition, embedded in my (our) very life. Herein lies the special impact of this principle: by better understanding RISK in my personal life, my life has changed for the better. I am now on a path that is fun, purposeful, more insightful, meaningful, and becoming more fearless (the dialectic between spirit, ego, and fear (miracle) in the course is here...).

Your process is absolutely different from the trading consulting business in that your goal is to help the student "grow" personally. It so happens you use the trade dynamic as a metaphor to this end. NO ONE else does this....NO ONE. No one else understands or EVEN comprehends the existence of the MATRIX.

My Warmest Regards,

Chris H.

Editor's Note: We want to hear about the one most profound insight that you got from reading Van's new book, Trading Beyond the Matrix, and how it has impacted your life. If you haven't purchased Trading Beyond the Matrix yet, you can do so here. When you are ready to tell us about your insight, send an email to van@vantharp.com. We are looking forward to hearing from you. If we pick your submission we will share it this newsletter. Learn about this contest.

New, Second Edition, The Definitive Guide To Position Sizing Strategies is Now Available!

The name Van Tharp is often synonymous with the term Position Sizing. In fact, Van invented and coined the term. It's one of the most important concepts that a trader can understand, yet so often, traders misjudge how critical a role it plays in your results. To help traders, Van set out to create the definitive compilation of this weighty subject some years back. Based on the feedback from the book’s first edition readers, he was quite successful and now he is releasing the second edition.

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Have you figured out yet how to pick the right stocks? Are you still looking for a high win-rate trading system? When you’re ready to get serious about your trader education, download the Position Sizing Game to learn some true fundamentals of trading success. Learn more.